McIntyre v. Sec. Comm'r of S.C., Appellate Case No. 2015-001845

• Decision Date: 17 October 2018
• Docket Number: Appellate Case No. 2015-001845,Opinion No. 5602
• Citation: 823 S.E.2d 193,425 S.C. 439
• Court: South Carolina Court of Appeals
• Parties: John M. MCINTYRE and Silver Oak Land Management, LLC, Appellants, v. SECURITIES COMMISSIONER OF SOUTH CAROLINA, Respondent.

425 S.C. 439

823 S.E.2d 193

John M. MCINTYRE and Silver Oak Land Management, LLC, Appellants,

v.SECURITIES COMMISSIONER OF SOUTH CAROLINA, Respondent.

Appellate Case No. 2015-001845

Opinion No. 5602

Court of Appeals of South Carolina.

Heard February 6, 2018

Filed October 17, 2018

Rehearing Denied February 19, 2019

Robert V. Mathison, Jr., of Mathison & Mathison, of Hilton Head Island; and Cory E. Manning, of Nelson Mullins Riley & Scarborough, LLP, of Columbia, both for Appellants.

Attorney General Alan McCrory Wilson, Assistant Attorney General Ian Parks Weschler, and Assistant Deputy Attorney General Tracy A. Meyers, all of Columbia, for Respondent.

HILL, J.:

John M. McIntyre and Silver Oak Land Management, LLC (collectively Appellants) appeal the order of the circuit court affirming a $540,000 civil penalty imposed upon them by the Securities Commissioner of South Carolina. Because the Commissioner's administrative enforcement action deprived Appellants procedural due process, we reverse and vacate.

I.

The Attorney General of South Carolina, acting as the Commissioner pursuant to S.C. Code Ann. § 35-1-601 (Supp. 2017), began this administrative enforcement action by serving Appellants with a Cease and Desist order on April 19, 2013, alleging thirty-nine acts of securities fraud related to Appellants' offer, sale, and management of interests in numerous limited liability companies (LLCs). Besides ordering Appellants to cease and desist from violating the S.C. Uniform Securities Act (the Act), the order reserved the right to levy a $10,000 civil penalty for each violation of the Act, as well as the cost of "the investigation and proceedings," unless Appellants chose to let the order become effective "by operation of law," as provided by S.C. Code Ann. § 35-1-604(b) (Supp. 2017), in which case they would have to pay a $50,000 civil penalty.

Appellants chose not to let the order stand and instead requested a hearing. The Commissioner appointed an assistant attorney general as the Hearing Officer. After four days of hearings, the Hearing Officer issued a Report and Recommendation, concluding the LLC investments were not securities and the Cease and Desist order should be dismissed.

The Commissioner disagreed, finding the LLC investments were securities covered by the Act and ordering the Hearing Officer to issue another Report and Recommendation as to whether Appellants had violated the Act.

The Hearing Officer's second Report and Recommendation found Appellants had committed seventy-eight violations of the Act. After reviewing this Report and Recommendation, the Commissioner concurred in its findings but "reiterated" his own findings from the previous order and made new factual findings. The Commissioner reduced the number of violations to fifty-four and imposed the maximum civil penalty of $10,000 for each violation, for a total penalty of $540,000. This order also required Appellants to pay the costs of the investigation and proceedings, and there was no provision allowing Appellants to contest the amount of the costs or be heard in response.

Appellants petitioned the circuit court for review of the Commissioner's decision, contending the administrative proceeding violated their due process rights, the LLC investments were not securities, and substantial evidence did not support the Commissioner's findings. The circuit court affirmed the Commissioner's decision.

II.

Appellants claim the Commissioner denied them procedural due process by not promulgating rules for the hearing procedure. As a result, Appellants had no notice of the availability, order, or scope of opening and closing arguments; the order or burden of proof; the standard for admissibility of evidence; the existence of subpoena rights; or any other fundamental aspects of the hearing. Appellants point to S.C. Code Ann. § 35-1-605(a)(1) (Supp. 2017), which states, "The Securities Commissioner may issue forms and orders and, after notice and comment, may adopt and amend rules necessary or appropriate to carry out [the Act]...." Judicial review of the Commissioner's factual findings by the circuit court is discussed in § 35-1-609, but is silent as to our scope of review. Appellants' claims require us to interpret the legislative intent of the Act, and also decide whether the Commissioner's actions violated due process. We may decide these questions of law without deference to the rulings of the Commissioner or the circuit court. See Jeter v. S.C. Dep't of Transp. , 369 S.C. 433, 438, 633 S.E.2d 143, 146 (2006) (holding interpretation of statute is a question of law); Charleston Cty. Parks & Recreation Comm'n v. Somers , 319 S.C. 65, 67, 459 S.E.2d 841, 843 (1995) (holding determination of legislative intent is a matter of law).

Our supreme court has twice confronted an administrative agency's failure to enact procedural rules for hearings. In the first case, Tall Tower, Inc. v. S.C. Procurement Review Panel , 294 S.C. 225, 363 S.E.2d 683 (1987), the issue was whether the South Carolina Procurement Review Panel's failure to adopt hearing rules and procedures violated a bid protestor's rights of due process as guaranteed by Article I, section 3 of the South Carolina Constitution. Tall Tower , 294 S.C. at 232, 363 S.E.2d at 686. The bid protestor asserted that because S.C. Code Ann. § 11-35-4410(5) (1986) stated "the [p]anel shall establish its own rules and procedures for the conduct of its business, including the holding of necessary hearings," the Panel's failure to do so violated its due process rights. Id . Our supreme court disagreed, noting the bid protestor could show no substantial prejudice from the Panel's actual conduct of the hearing. Id . at 294 S.C. at 232–33, 363 S.E.2d at 686–87.

The issue arose a second time in Unisys Corp. v. S.C. Budget & Control Bd. , 346 S.C. 158, 551 S.E.2d 263 (2001), but in a markedly different context. It was another bid dispute amidst the Procurement Code, but this time the disappointed bidder claimed its right to due process guaranteed by Article I, section 22 was violated because the Legislature—not the agency—had failed to establish procedures for hearings before the Chief Procurement Officer (CPO). Unisys Corp. , 346 S.C. at 173–74, 551 S.E.2d at 272. The supreme court again disagreed, holding due process was satisfied because appeal of the CPO's decisions was heard de novo by the Procurement Review Panel. Id . at 174-75, 551 S.E.2d at 272. The supreme court reasoned because the procedure set forth by the Review Panel established adequate due process, there could be no substantial prejudice. Id . at 175, 551 S.E.2d at 272.

As mentioned, Unisys found the lack of procedural safeguards at an administrative hearing was cured by the availability of de novo review by the Procurement Review Panel. Id . at 175, 551 S.E.2d at 272. Two features of the Act prevent this cure from working here. First, rather than de novo review, judicial review of the Commissioner's ruling is made using the substantial evidence standard, and—importantly—the factual findings of the Commissioner are "conclusive" if supported by competent, material, and substantial evidence. S.C. Code Ann. § 35-1-609 (Supp. 2017).

Second, as the Act was administered here by the Commissioner, the Hearing Officer's ruling was merely advisory and intermediate. It is unclear what statutory authority empowers the Commissioner to conduct a review of the Hearing Officer's ruling, but it is clear Appellants had no opportunity to present evidence at this stage or otherwise be heard. This diluted whatever fairness and impartiality the procedure before the Hearing Officer may have had. Unlike Unisys , where the internal appeal to the Panel expanded the bidder's due process and cured its earlier curtailment, the Commissioner's review diminished Appellants' right to be heard. By silently reserving the right to not only reject the Hearing Officer's factual findings and rulings but to make its own findings without notice, hearing, or any further opportunity for input, the Commissioner undermined its own ad hoc procedure. A party is not entitled to a hearing at each stage of agency review, but a meaningful hearing must occur at some stage. See Ross v. Med. Univ. of S.C. , 328 S.C. 51, 68–69, 492 S.E.2d 62, 71–72 (1997).

Section 35-1-605(a)(1) directs that the Commissioner provide rules for hearings "to carry out" its authority under the Act. But there is more: the rules must be made after "notice and comment," a requirement critically absent from the statutory language in play in Tall Tower and Unisys . Id . Aware that it had exempted the Securities Act from the Administrative Procedures Act (APA), see S.C. Code Ann. §§ 35-1-601, 609 (Supp. 2017), and, consequently, the APA's requirement that notice and comment occur before an agency's rules can become law, the Legislature required that notice and comment precede the Commissioner's rulemaking to remove any temptation of the Executive Branch to amass underground regulations. See § 35-1-605(a)(1).

Rather than complying with the Legislative directive, the Commissioner chose not to promulgate any rules regulating the conduct of or procedure appropriate for administrative hearings. This leaves the Commissioner with the awkward argument that because § 35-1-605(a)(1) uses the word "may," it is not required to adopt any rules of procedure at all.

We find this position curious, and one that cannot survive scrutiny. That scrutiny occurs within the framework of the due process guarantees of South Carolina Constitution Article I, § 3 and § 22. We will take up § 22 first, as it applies specifically to agency actions.

A. S.C. Constitution Article I, Section 22

In 1966, the Legislature appointed a commission chaired by then Senator (later Governor) John C. West to study and propose amendments to the South Carolina Constitution. Among its recommendations, the West Committee recognized the creeping rise of the administrative state, noting agency...